SMEs and start-ups to be affected by merger of R&D schemes, claims ICAEW

ICAEW has raised concerns regarding the government’s suggested merger of the two research and development (R&D) tax relief schemes to reduce complexity and mitigate fraud.

It stated that SMEs, including start-ups, will be “disproportionately affected” by the proposed changes, as these would come at a time when SMEs are already “disadvantaged” by the cost of living and energy crisis compared to their larger competitors.

ICAEW also said that its members were not opposed to an RDEC -style ‘above the line’ scheme, but “stressed” that companies are facing a lot of tax changes.

For many SMEs, ICAEW felt it would be an entirely new method of claiming R&D tax relief.

It suggested that education and guidance would be “imperative” to smaller entities who are less likely to have significant designated tax resources to manage these changes.

Members believed that the proposed April 2024 date for its introduction should be delayed, as a reasonable commencement period is required to ensure that education and guidance can be provided.

Regarding who is entitled to relieve when work is contracted out, there were differing opinions and no clear consensus. Both of the solutions put forth during the consultation have benefits and drawbacks.

It recognised that if the policy intent is to influence investment and drive behaviours, the customer should likely obtain the tax credit as the instigator of the project and having made the investment.

Members also accepted that SMEs were more likely to subcontract R&D.

On balance, ICAEW’s Tax Faculty suggested that the customer should claim the relief.

However, it pointed out how difficult it would be to confirm that the work done by the contractor qualified as R&D under this route.

The Tax Faculty also stated it thought the government should take into account enacting a transitional rule that would allow a combined election to continue under the previous regulations for a limited time.